Advance payment is when you receive payment before you deliver goods or services.
Often when you sell goods or services, you send invoices with a future due date in order to get paid. This is what we call a deferred payment: The payment is received after the goods or services have been delivered.
For example, an invoice can have payment terms that state that the payment is due 14 or 30 days after the invoice is issued. This is called net 14 or net 30 payment terms.
Sometimes though, it might be necessary or advisable to ask for advance payment, and you can agree to this with your client.
When can you ask for advance payment?
There are several reasons to ask for advance payments:
- The client has a bad track record or bad credit score, and you want to ensure that you’re paid in good time, and that you get paid the full amount.
- You have to pay a lot out-of-pocket to supply the service or product, or it’s a long-term project where you have a lot of expenses before you can invoice the client.
- You sell subscriptions or rent out property.
The invoice must still meet all the requirements for a valid invoice.
How do you ask for it?
To ask for advance payment, you would usually create a normal invoice and set the due date as due upon receipt. You can specify on the invoice that the goods or services won’t be delivered until payment has been received.
If you sell goods online—also called ecommerce—and the client pays upfront, you can create a receipt or a cash invoice to document the sale.
You should make sure to bookkeep all these sales in accordance with accounting principles: in other words, the upfront payment and the subsequent sale should be recorded in the same month. An accountant can help you with your bookkeeping.